By ipomarket.in Editorial Team · Last reviewed: 2026-11-13
Disclaimer: This article is for informational purposes only and does not constitute investment advice. IPO investments are subject to market risks. Please read the offer document carefully and consult a SEBI-registered investment advisor before investing.
When the government sells its stake in a public sector undertaking (PSU), it does not always do so through a fresh IPO. It often uses an Offer for Sale (OFS) instead. For retail investors, the two routes look similar on screen but work very differently under SEBI's rules. This article walks through those differences, with particular attention to how PSU issues carry regulatory features that private-sector offers do not.
IPO vs OFS: the core difference
The starting point is simple. An OFS does not create any new shares. It is the sale of existing shares already held by current shareholders, so the money goes to the seller, not the company. An IPO, by contrast, typically involves the issuance of new shares and raises fresh capital for the company itself.
That single distinction drives several practical consequences. An OFS transaction completes in a single trading day, while an IPO application runs within a multi-week public-issue timetable. If you are used to the ASBA-based IPO process, the compressed OFS window is worth noting. For a refresher on the basic mechanics, see our explainer on fresh issue vs OFS and where the money goes and the difference between an IPO and an FPO.
A useful checklist when you see either route: identify what is being sold, who receives the money, whether the share count changes, and which application process applies. Those four questions separate a capital-raising event from a shareholder exit.
OFS allocation rules under SEBI
SEBI has built specific guardrails into the OFS mechanism. A few that matter for retail participants:
- Retail reservation. In an OFS, 10% is usually reserved for retail participants, often with a discounted offer price as an incentive.
- Single-bidder cap. A single bidder, excluding mutual funds and insurance firms, cannot be allocated more than 25% of the total shares sold.
- Eligibility. The OFS mechanism is available only to companies ranked among the top 200 by market capitalisation.
SEBI has also tightened how much a pre-IPO shareholder can offload. Shareholders holding more than 20% stake before the IPO are allowed to sell up to 50% of their shares in the OFS, while those holding less than 20% can sell only 10% of their shares. These limits are designed to prevent large, abrupt exits from distorting the market.
As one research view puts it, an OFS can improve the public float without diluting the share count, yet a large exit may warrant closer reading. In other words, who is selling and why is as important as the headline price.
What makes a PSU issue different
PSU IPOs and OFS deals carry additional features that flow from their status as state entities.
Judicial oversight
Public sector units are treated as an instrumentality of the state under Article 12, which gives them judicial oversight. This is described as a major difference in how public and private sector entities function. For an investor, it means a PSU operates within a different accountability framework than a privately promoted company.
Promoter contribution and lock-in
For PSU IPOs, promoters must contribute not less than 20% of post-issue capital, and that portion is locked in for a period of 3 years. Lock-in rules matter because they signal how much skin the promoter keeps in the game and when that stake becomes tradable. Our guide on the IPO lock-in period for promoters and anchor investors covers this in more detail.
Retail reservation in PSU disinvestment
Separately from the general 10% OFS retail reservation, the government's disinvestment programme has reserved 20% of shares in PSU OFS transactions for retail investors on a case-by-case basis. The intent was to make the disinvestment programme more inclusive.
Relaxed open-offer pricing
SEBI has relaxed the open-offer pricing formula specifically for PSU disinvestments. This is a regulatory accommodation that does not apply to ordinary private-sector change-of-control transactions.
How PSUs have performed: the numbers to weigh
Valuation and returns data cut both ways, and the figures here are reported views rather than settled facts, so treat them as inputs for your own analysis.
On valuation, one market commentary notes that private sector banks typically trade at 2.0x to 2.5x book value, whereas public sector banks trade at close to one time their book value. A lower multiple can reflect either value or persistent discount, depending on the business.
On earnings, the same body of commentary reports that during FY19-24, PSU earnings grew at a 33.8% CAGR, compared with 18.6% for the private sector. That is a notable gap, but it covers a specific window and should not be read as a forward promise.
On OFS outcomes specifically, market experts have observed that the past 12 PSU OFS transactions (excluding Coal India) under-performed the BSE 100 from the time of their OFS till date, based on an older assessment. The caveat is important: this is a dated, reported finding, not a current scorecard, and the exclusion of Coal India tells you single names can swing the picture.
The takeaway is not that PSU issues are good or bad. It is that cheap-looking multiples, strong past earnings growth and weak post-OFS performance can all be true at once, which is exactly why a company-by-company read matters.
What retail investors should analyse
Before engaging with any PSU IPO or OFS, work through the same discipline you would apply to a private issue, plus the PSU-specific angles:
- Route. Is this fresh capital for the company (IPO) or a stake sale (OFS)? Where does the money go?
- Who is selling and how much. Check the shareholder and the cap that applies, 50% or 10% depending on pre-issue stake.
- Reservation and discount. Confirm whether a retail reservation and discount apply, since OFS retail reservation is typically 10% and PSU disinvestment has reserved 20% on a case-by-case basis.
- Lock-in. For PSU IPOs, note the 20% promoter contribution under a 3-year lock-in.
- Valuation context. Compare the pricing against listed peers rather than headline optimism.
For the broader evaluation discipline, our 10-step framework to analyse an upcoming IPO is a good companion read.
FAQ
What is the main difference between an IPO and an OFS?
An OFS does not create new shares; it is the sale of existing shares held by current shareholders, so proceeds go to the seller. An IPO involves the issuance of new shares and raises fresh capital for the company. An OFS also completes in a single trading day, whereas an IPO runs on a multi-week timetable.
How much is reserved for retail investors in an OFS?
In a regular OFS, 10% is usually reserved for retail participants, often with a discounted offer price. Separately, the government's PSU disinvestment programme has reserved 20% of shares for retail investors on a case-by-case basis.
Is there a limit on how much one bidder can get in an OFS?
Yes. A single bidder, excluding mutual funds and insurance firms, cannot be allocated more than 25% of the total shares sold. The OFS mechanism itself is available only to companies ranked among the top 200 by market capitalisation.
What lock-in applies to PSU IPO promoters?
For PSU IPOs, promoters must contribute not less than 20% of post-issue capital, and that portion is locked in for 3 years.
Have PSU OFS deals performed well historically?
According to an older assessment by market experts, the past 12 PSU OFS transactions excluding Coal India under-performed the BSE 100 from the time of their OFS till date. This is a reported, dated finding, so verify current data before drawing conclusions.
Last reviewed: 2026-11-13 by the ipomarket.in Editorial Team.